It may be postponed for now, but what happens to the Treasury market if and when the next COVID-19 bailout bill passes? If President Trump is reelected, it will likely go through in November. If Joe Biden wins, then we could have an even bigger bailout in January when he takes power.

Mark Cabana, head of US Rates Strategy at Bank of America, as quoted by Zero Hedge, believes that if and when it happens, issuance at the long end of the curve will be increased. He’s right. The question I’ll deal with here is, by how much?

Here I’ll bring you through the math precisely, step by step, and show why the answer is between three and six times the issuance rate of the past six years. The exact rate depends on how fast the Treasury needs to raise the money, and that depends on how fast Congress proposes to spend it all. If recent history is any guide, then the answer is pretty fast.

The end point I want to make here is that a 3-6x rate of increase in Treasury note supply going forward would be unprecedented and could trigger foreigners to sell their holdings, triggering a spike in long-term rates, a big fall in the dollar index (UUP) on foreign exchanges, and a spike in the price of gold to new all time highs and beyond. No – rising long-term rates would not bring down gold’s dollar price, not if it’s being spurred by international bond selling and inflation fears. It didn’t in the late 1970’s, and it won’t now.

Where We Are Now

In the ZeroHedge piece, Cabana is quoted directly as follows:

“The limited supply impact (in Treasury bills) is due to the very large existing UST cash balance and recent coupon supply increases